Lessons on Financial Planning for Young Investors - SEBI

8/19/2019 Lessons on Financial Planning for Young Investors - SEBI

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“The content of the book is developed by MCX Stock Exchange and FTKMC under

the guidance of the Advisory Committee for the Investor Protection and Education

Fund (IPEF) of Securities and Exchange Board of India (SEBI)”


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Key Learning Objectives:

After reading this booklet, you will be able to understand the

following:

• Need for financial planning

• Need to plan at early age so that you can meet your financialneeds in time

• Various investment avenues in the Indian financial market

• Precautions to be taken before making investments

• Investment strategies to achieve your financial goals

• How to begin investing?

INTRODUCTION

FINANCIAL PLANNING

SMART GOALS

HOW TO ACHIEVE YOUR GOALS?

RISK VS. RETURN

THE POWER OF COMPOUNDING

INFLATION EFFECTS ON INVESTMENTS

SAVINGS VS. INVESTMENTS

LOANS VS. INVESTMENTS

SAVINGS & INVESTMENT RELATED PRODUCTS

PROTECTION RELATED PRODUCTS

BORROWING RELATED PRODUCTS

INVESTMENT STRATEGIES

HOW NOT TO LOSE MONEY

HOW TO BEGIN INVESTING

ADVANTAGES OF FINANCIAL ED UCATION

INVESTOR PROTECTION & GRIEVANCES

REDRESSAL MECHANISM

SUMMARY

IMPORTANT WEBSITES


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Planning of finances is essential for each and every one, be it a school-going kid or a retired

citizen. The more early you begin to manage your money, the better it is. Let’s suppose you

choose not to plan and keep spending as and when you like and one day you wish to purchase

a house but then you cannot, as you hardly have any savings left. This is what happens when

you don’t plan and end up overspending.

We tend to overspend when we do not understand what we really need. We keep on spending

to fulfill all our requirements and we lose count of how much we spent. One should understand

the difference between your needs and wants. Things like daily lunch, dinner and house rent

payments are our needs which we will have to incur. But things like play stations, videogames

and movies are always an option and can be done without. If even, we do want to splurge on

our wants, we can set aside some of our savings over a time period and can buy important

needs like vehicles, house, higher education etc., when we have accumulated savings. This is

what planning is all about, to plan, save and help us achieve our financial goals.

When you start early, you can always plan for your future financial goals and have the benefit

of meeting them when you want to. This is because you have a longer time horizon to spread

out your investments and manage your portfolio across time. Every school-going kid is

taught from his childhood to count and save money for his future so that he can use them

appropriately to finance his financial goals.

This tutorial on financial planning presents various aspects of financial planning for college

students. Financial planning is very important for every individual. If people understand its

significance at a younger age, achieving your future financial goals becomes more convenient

as you can invest in different products to meet your needs.

2. FINANCIAL PLANNING

Financial Planning is important as it helps us meet our future goals. Every individual needs to

understand the need to manage his or her finances. Let us look at an example to understand

why.

The following excerpt is a conversation between a college student, Shantanu (17), who is

pursuing his graduation in Finance, and his elder brother, Nikhil (35), who is working as a

financial planner. The conversation gives an insight into planning and introduces the concept

of financial planning.

SHANTANU: It is my best friend’s birthday after a week. I wish to host a surprise party for

him. I would like to invite our classmates for snacks. Could you please guide me?

NIKHIL: First of all, you need to plan the event and accordingly make the necessary

arrangements.

SHANTANU: But why should I plan?


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NIKHIL: A plan will give you a detailed picture of your needs, resources and goals you wish

to achieve. Without making a plan you would be unsure of completing the task at hand and

could end up wasting the available resources. Suppose we don’t plan for the birthday, then it is

possible that all of your classmates may not be invited; the snacks may not be delivered in time

and the birthday party may not turn out as good as you wanted it to be. But if we plan, we can

make sure not to make any errors and we will be better equipped to handle any unusualsituations.

SHANTANU: Oh! I had never thought of this before. Our Professor for Investments in the first

session of financial planning was telling us about why we need to plan. What does financial

planning mean?

NIKHIL: Financial Planning means to plan your finances. For this, it is important that one

understands his financial needs or objectives and then plan how he can achieve these

objectives or goals by making investments or by borrowing funds.

SHANTANU: Is this what your profession is all about?

NIKHIL: Yes, as a financial planner I assist investors to help plan their finances and manage

their investments. We assist investors in choosing the right asset classes to park their funds so

that they can achieve their personal financial needs in future.

SHANTANU: So how do I plan for the birthday party?

NIKHIL: Let’s note down the things we have and things we need for the party. (Look at the

following box items that Shantanu writes down as his brother asks him.)

NIKHIL: To start with, how many people would you be inviting for the party?

SHANTANU: I am planning to invite our entire class of 30 students.

NIKHIL: That’s a big group of people. Have you collected any funds to arrange for the party?

SHANTANU: I have managed to collect ` 6090 from my classmates.

NIKHIL: Now that we have an idea of how many guests are invited and the available funds we

can plan the event accordingly. First of all, we should allocate our funds to the snacks and the

birthday cake so that the funds are utilized well. Do you know the charges for the snacks?

SHANTANU: I have found out that party orders at the nearest fast food corner for 30 people

would cost us close to ` 3000.

PARTY PLANNING

Guests (in nos.) 30

Funds ( ` ) 6090

Snacks ( ` ) 3000

Gifts ( ` ) 2500

Balance ( ` ) 590

NIKHIL: So this would cost us 50% of the funds collected. Do you wish to buy your friend a gift

and give away souvenirs to the guests?

SHANTANU: Yes, but is it possible? I want to buy a play station for my friend on behalf of all of

my classmates.


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NIKHIL: It is possible provided you select gifts that are reasonable enough to fit in our budget.It is important to always make sure that you always have an idea of the funds available beforemaking plans. A play station sounds good but it might cost us more than what we can spendright now. We might instead buy a gift that is more reasonable. You might gift some brandedclothes that he might like.

SHANTANU: That would be a good idea. The nearest gift items store has all kinds of gifts at

attractive prices from where we can get the souvenirs too. It might cost us around ` 2500.

NIKHIL: This would leave us with ` 590. Do you wish to have any extras like games?

SHANTANU: I think we should have games. We might use the rest of the funds for it and I canbuy chocolates for all of us.

NIKHIL: Then I think we have made a plan for the party. Now all you need to do is place thesnack order well in advance and buy the gifts a day before to avoid last minute hassles.

SHANTANU: Thank you so much. Now I am sure I will be able to arrange for the event.

NIKHIL: Always remember that whenever you need to carry out a task you always need to planfor it before.

EXERCISE:Observe how Shantanu writes down the plan for the party. If he had not declared the amountof funds he had collected, planning for the event would have been tough. If Nikhil would nothave asked him about this initially Shantanu could have ended up buying expensive gifts andwould have no funds left for the snacks. Also note that Nikhil advises him to plan in advance sothat he avoids making errors and last-minute rush.

You can plan your finances in the same way as Nikhil helped Shantanu plan for the partyexcept that you need to be extremely careful about where we invest our money to make

optimal usage of funds. Financial planning involves various aspects like goal identification,asset allocation, portfolio management, etc., which helps an investor to organize his finances. The following conversation between Shantanu and his brother Nikhil would help you get abetter insight into financial planning.

Activity 1: Prepare your monthly budget by specifying your pocket money, monthly expensesand savings for the month. You can look at the above example where Shantanu prepares aplan for his friend’s birthday party to make your monthly budget. You can use the following

box shown below to list out your budget items.

YOUR MONTHLY BUDGET

A: Income

• Pocket money

• Part-time assignment

• Prize

• Stipend

• Cash gifts, if any

B: Expenses

• College fees

• Party

• Gift

• EMI, if any

• Lunch

• Traveling Expenses

• Others


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C: Balance (A-B)If your income is greater than your expenses, you are planning your finances adequately. However,

if your balance is negative, you need to start planning your finances right away.

DID YOU KNOW?IDEALLY YOUR SAVINGS SHOULD BE 20% OF YOUR TOTAL INCOME

PERSONAL BUDGET

Meanwhile, Shantanu has finished with the university level examinations in finance. After

learning about the importance of financial planning Shantanu now wants to manage his

finances well so that he can repay his loan and keep enough funds for his future needs.

Shantanu approaches Nikhil for his advice.

Shantanu: Hello, Nikhil. This time my project was judged to be the best. Your insights really

helped a lot. I wanted to ask you how I could plan my finances.

Nikhil: First of all, you should make a habit of preparing your monthly budget.

Shantanu: How can I do that?

Nikhil: A monthly budget is a detailed plan of your income, monthly expenses, future expenses

and the balance income left with you. (Look at how you prepared the budget plan for the

party earlier and try making new additions and changes to the budget plan as Nikhil guides

Shantanu.)

Nikhil: First write your monthly income on the top. If you are not earning write down the

monthly allowance you get as your pocket money to meet your expenses. Write down theitems on which you are likely to spend money. Write an itemized detail of the money you

spend through the month. Also, identify the unnecessary expenses you make through the

month. In case you have any future plans to buy or sell assets keep a note of it. What’s more

important is that you should maintain this record and keep writing details every day. One

should be very honest too. It is important to declare the right income and expense figures as

your future plan outcomes will depend on it.

Shantanu: I already feel that I can do it now. Is that all?

Nikhil: Not yet! Let me touch upon few more things in addition to what I had told you earlier

before your exams. You should know your assets and liabilities. Asset is a resource that you

own and can be easily converted to cash. Remember the money bag I spoke of earlier? Themoney bag is an asset as it has your monthly income and it can be easily converted to cash.

Assets are resources, which you can use to pay off your debts. On the other hand, liability is an

obligation to pay back. Your monthly bills and other expenses are all your liabilities, which you

should pay up using your assets. Always structure your budget plan by writing your income

under the head ‘assets’ and expenses under the head ‘liabilities’.

IMPORTANCE OF FINANCIAL PLANNING

SHANTANU: I have been assigned a project on ‘Financial Planning’ and I am facing a few

difficulties. Could you help me solve them?

NIKHIL: Sure. Do tell me your queries.


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SHANTANU: My project has six segments. In the first segment, we need to introduce the

concept of financial planning. Could you tell me what financial planning means?

NIKHIL: Financial planning means to plan your finances which help you identify your financial

needs and objectives and then make investments accordingly to meet your requirements. Letme show you how financial planning takes place and the various steps of the process.

Steps Involved in the Financial Planning Process

Look at the following flow chart which Nikhil chalks out for Shantanu to help him understand

the process of financial planning.

The five steps of the financial planning process are:

• Gathering your financial data - such as details on your income, debt level, commitments,

etc.

• Identifying your goals

• Identifying any financial issues or gaps between where you are now financially and whereyou want to be.

• Preparing your financial plan - which will identify recommended investments and will

address your attitude to risk

• Implementing your financial plan -reviewing and revising your plan - to ensure it stays up-

to-date and relevant to the economic climate and your changing lifestyle

Step1: Gathering your financial data

NIKHIL: Financial planning constitutes these 5 basic steps. At the first step, you will need to list

down your various sources of income. If you are an earning individual, your source of income

could be your monthly pay, and if you are running a part-time business, then the income

generated from that business would also add to your income. The source of income will varyacross people. For you, it could be your pocket money, for an earning individual it will be his

monthly pay, for a retired individual it could be his pension income or retirement plan returns.

Once you know how much you get each month, you will know what you can afford to spend

and how much you can invest. In other words, unless you know how much you have in your


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pocket, you can’t venture out for shopping.

SHANTANU: Why is it important to manage our finances?

NIKHIL: If you manage your finances, you would be able to use your money better. If you

don’t, you would not be able to meet your needs. Let’s say today is the first of the month. You

have got your salary and you spend all the funds in your money bag on clothes and otheraccessories, then you would not have any money left to pay off your monthly bills and other

payments through the month. Learning to save is essential or else you cannot meet your basic

needs even though you earn a handsome pay.

SHANTANU: I really need to keep this in mind. What is the next step?

Step 2: Identify your financial goals

SHANTANU: It is said that one needs to identify his or her investment objective before he

starts planning his finances. Is it true?

NIKHIL: Defining one’s investment objective is vital before planning for finances. Your goalswill tell you how you should manage your finances so that when you wish to meet your goals

you have enough funds with you. You can then plan accordingly how much you need to save

today for the future plans and how much returns you will receive on your investments to fulfill

your future needs.

Your goals may be either short term, medium term or long term. Your short term goals could

be, say, to pursue an MBA after a year, to purchase a two-wheeler etc. Short terms goals are

defined to be met in up to three years. Medium term goals could be financing your marriage

expenditure, to gift your parents a vacation package etc. These goals are defined as those

needs which have to be met up to 5 years. Your long term goals could be to purchase a new

house and these would have to be met after tenure of 5 years. You could further define the

target date for each of these goals along with an approximate amount of funds you wouldrequire to meet these needs.

Step 3: Identifying any financial issues

NIKHIL: At this step you should also find out if you have any loans to be repaid. Someone

might have monthly insurance premiums to be paid, retirement plan premiums, or a home

loan. Determining your liabilities is extremely essential so that you do not overspend and end

up defaulting on your EMI (equated monthly installments) payment. You should also know

how much is your monthly expenditure; i.e., the money spent on food items, clothes, water,

electricity and other amenities used so that you can allocate some of your funds to pay for it.

SHANTANU: So not only is the source of income important, but we should also know ourliabilities too. Am I right?

NIKHIL: Absolutely. Let me make this simpler. Imagine you have a money bag and on the 1st

of every month you get your monthly pay and the money bag gets filled. This money bag is

your asset now and the monthly expenses like food bills, loan repayments, etc. become your

liabilities. Money flowing into the bag will be your income and money flowing out of your

bag will be your payments to others for the services you use. With time your liabilities would

increase as you grow old. You would have to support your spouse, your kids and so on.

Step 4: Preparation of Financial Plan

NIKHIL: One should prepare their financial plan depending upon various factors like his

income, risk taking ability, age group and investment objective.


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SHANTANU: Oh! So this means that financial planning would differ for me and you as well?

NIKHIL: Yes. This is because the income for two individuals may not necessarily be the s a m eand his personal needs could also be different and so on. A financial planner needs to note suchdifferences and then accordingly suggest investment avenues for the investors. If he considersall the investors to be the same then an investor might not be able to meet his financial needs

or objectives and the basic purpose of financial planning would not be met with. Suppose youapproach me to help you manage your finances. I would first take a look at your income, whichwould be your pocket money. Since your income is much less than an earning individual theinvestment avenues that I would suggest you would be different from what I would suggest anindividual who is currently working. You must understand that since your needs are differentfrom others you need to make investments that would suit your profile. Many investors failto understand this. Many individuals in the hope of making big profits invest most of theirfunds into below investment grade investments which offer high returns. One may profit ifthey perform well or else they may lose money. Every individual has a different risk appetiteand needs to keep this in mind before he chooses which product to invest in.

SHANTANU: Could you please tell me about risk appetite?

Nikhil: Good question! Risk appetite is the risk taking ability of an investor. This varies fromperson to person. If I am a rich businessman and my monthly income ranges to lakhs ofrupees, I might feel that losing a few thousand rupees would not be a matter of concern if Ican make high returns. People who are rich or who have a high net worth are willing to investaggressively unlike others. But if I am a middle class worker, then I might not be able to acceptsuch huge losses. As a rich man, I can afford taking losses or in other words I am willing to takehigh risks. But as a middle class worker, I can’t afford to take high risks. I might be able to takeup losses in a few hundred rupees only. If I am a retired individual, my risk appetite would bedifferent as I would need a regular income to support my personal needs like medical bills,health supplements, etc., which means that I would not be willing to take risks. Risk appetiteis allotted to individuals on a scale from low to high. For a retired individual, the risk appetitewould be low whereas for the businessman the risk appetite would be high. But for a middleclass worker it would be moderate. There are various investment avenues like equity, debt,fixed deposits, commodities, Forex capital, etc., each of which is termed as an asset class.

You can choose to invest in any of these asset classes provided you understand that eachof these asset classes differ from one another in terms of risks and returns. You should makeinvestments depending upon your risk taking ability.

Step 5: Implementing your financial plan

NIKHIL: After preparing your financial plan you need to review and revise your plan to stayup-to-date and relevant to the economic climate and your changing lifestyle.

SHANTANU: Is this what is meant by portfolio management?

NIKHIL: Yes. The entire collection of investments you make is termed as the portfolio. Suppose

you have ` 1000 and you invest 50% in equity and the rest in debt securities. Your entire

investment would be your portfolio which has a value of ` 1000 currently. This value mightincrease or decrease depending upon the market movements, which will bring a change inthe value of the securities you hold. Nowadays investors use various portfolio managementservices to help them manage their investments. Every asset is different from the other interms of risk and returns.

Every step in the process of financial planning is equally important. Most of the investorsdeclare their income, risk tolerance levels and also make investments but neglect monitoringtheir investments. If you do not watch over your investments, even if it had been making gainsit may become a loss making investment. Thus there is a need to periodically review yourportfolio and make changes in the portfolio as the situation demands. Suppose the equityinvestments have not performed well for the last quarter and you hold up to 70% of yourportfolio in the shares of these companies, then you cannot continue holding the same

portfolio. You might have to shift your funds to other asset classes that are less risky like bondstill the markets recover.


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A critical first step in managing your finances is to be able to setup SMART financial objectives.Your goals have to be S (specific), M (measurable, motivated), R (realistic, resource-based), and

T (time-bound, can be monitored). Many people make the mistake of setting general goals

which, more often than not, will not materialize.

Objectives Goals Incorrect Approach Right Approach

Specific You need to know

exactly what you want

and when

I need money to pay

my college fees in a

year’s time

I will save the money of

` 50,000 to pay my fees

at college

Measurable Your goal should be

measurable so that you

know when you can

achieve it

I will pay off my

debts to my friends

In the next six months, I

will return ` 3,000 to my

two friends for lending

me their money.

Attainable Your goals should be

reasonable i.e. within

your reach

I will save money. I will save ` 2,000 each

month by cutting down

on eating out and

partying.

Realistic Your goals need to be

based on resources

and tasks that you can

reasonably accomplish.

If I save money I will

be rich.

If I save regularly, need

not borrow more money,

I can pay off my debts

by next year and will

have enough savings till I

begin to earn.

Time-bound Goals with timelinesallow you to track your

progress and encourage

you to keep going until

you reach your goal

I will save money formy vehicle

I will save ` 10000 a yearfor the next 2 years for

my vehicle.

4. HOW TO ACHIEVE YOUR GOALS?

NIKHIL: Now that you know the different aspects of financial planning let us chalk out few

goals of yours and how you can go about achieving them. Tell me what are your goals for the

future?

SHANTANU: Yes. I would first like to finance my education and then a two wheeler.

NIKHIL: You should write your goals depending upon when you want to achieve them this will

help you categorize them.


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Table 1: Goals for Mr. Shantanu Age: 21 Years

Goals Goal Type Name Target Date Amount (Lakh)

Education Short term Self 2011 05.00

Two-wheeler Medium term Self 2014 00.50

Vacation Medium term Parents 2016 1.00Marriage Long term Self 2018 10.00

House Long term Self 2020 60.00

Once you do this you should plan your investments accordingly.

Goal Goal Type Target Date Action plan required

Education Short term 2012 Finance your fees partly from your parents

funds and partly by taking loan

Two-wheeler Medium term 2015 By 2013 it is expected you would begin to

earn money. So you can save 10 thousand

every year so in three years you can haveenough funds to buy a vehicle

Vacation Medium term 2018 Also keeping in mind this goal you can make

suitable investments like equity and mutual

funds to earn sufficient returns to fund the

vacation for your parents provided you plan

well in advance

Marriage Long term 2020 Make investments in equities, debt and

mutual funds which will give you sufficient

returns to cover your expenses

House Long term 2022 You can make investments in Fixed deposits

which will help you to lock away funds for

this goal, however as this would not beenough you should look at other options as

well

5. RISK V/S RETURNS

Every individual has its own risk taking capacity. Your risk-return profile is your level of risk

tolerance. If you invest in a high risk business like a start up firm your risk would be high. There

are three types of risk return profiles which you can fall under depending upon your source of

funds and the investments you choose to make. They are:

1. Conservative i.e. you take minimal risks ensuring your funds are secure. You prefer investing

in post office deposit schemes, bank fixed deposits, government bonds

2. Moderate i.e. you are willing to take some risks and prefer investing in mutual fund

schemes

3. Aggressive i.e. you are willing to take high risks and prefer investing in equity, commodities

markets and you may even be speculating for returns.

There is an important investment principle which says the level of your returns depends on

the level of risk you take. While you stay invested it is crucial you take necessary measures to

manage your risk. Once you invest in any asset class you should monitor your investments andkeep yourself updated about various market happenings to avoid any pitfalls. Always check

the potential risks when quoted returns are unusually high.


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Time is an influential factor when it comes to investments. Your returns depend upon the time

you enter and exit. Compounding is a concept which when followed with dedication gives

great rewards. However, it rewards better when savings are compounded over longer horizons.

Compounding, in short, basically means earning interest on previously earned interest. Let us

look at an example:

If you set aside a sum of say ` 5,000 every month from the age of 25, at a return interest rate of

10%, in 60 years you will have with you funds worth about ` 1 crore ( ` 10 million) and more.

However, if you start at 40 with the same amount and return rate of interest, the retirement

fund will amount to only around ` 33 lakh ( ` 3.3 million).

Consider you invest ` 100 for a period of 5 years.

Year Amount (at 10% fixed rate

of interest)

Floating rate of

interest

Amount (terms of floating

rate)

1 110 10% 110

2 121 9% 119.9

3 133.1 12% 133.50

4 146.41 10% 146.8508

5 161.05 9% 160.06

Notice here that the ` 100 that you had invested will fetch you ` 161.05 in 5 years in terms of

fixed interest rate and similar results in terms of floating rate as well. Thus in 5 years you stand

a chance of making around 60% return!!!

Thus compounding is a tool that helps you make phenomenal growth in your investments over

a period of time. Thus the more time you have, the more money you are capable of making

and this is exactly why financial planning is so very important.

Recurring deposits and Systematic Investment Plans (SIPs) can help you on this front, ease

in payment of this regular investment amount through a direct debit facility or post-dated

cheque can help you execute your compounding strategy.


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Inflation is rise in prices for goods and services. As the prices rise, lesser number of people can

buy them. Let’s say the rate of petrol changes from ` 40 to ` 45, with no change in quality. Then

the price difference indicates inflation.

If you are earning returns of 10% over your investment of ` 5000 which is ` 500 after a year and

the inflation rate is 11% then you will end up giving your returns due to high inflation rates.

Hence always ensure your returns are above the inflation rates. You should also understand

the time value of money.

Time Value of Money

SHANTANU: Yes. I know about the time value of money. I remember our Investment Professor

telling us about this. He gave us an assignment to help us understand this. He asked us to find

out the value of things in our house, which we use the most, and to list down their price or

value today and their value 5 years back. We found out that when we compared their values,

their value today was much higher.

NIKHIL: This is because of the time value of money. As time passes you will realize that if 10

years back you could afford to purchase a full lunch for ` 10, today you might afford to get few

pieces of vegetables only. This means that the value of a thousand rupee note would be higher

today than after five years. If you invest ` 1000 today, at 5% per annum, then after a year you

would receive ` 1050. Thus ` 1000 received today is equivalent to ` 1050 received after a year.

In order to protect one’s money from losing its value people invest their money. Now I guess

you understand the rationale for investing in stock markets, which is to get returns which are

higher than rate of inflation. What you also need to know is that borrowing and spending

is not that easy. When you borrow you take up a liability that is you agree to repay and the

amount you repay is the original amount you had borrowed along with an interest payment,

which is levied upon the amount you borrow.

Activity 2: List down the various items you often use and write down their value today and

its value 10 years back. Compare the two values and observe how the value of money has

changed over time.

TIME VALUE OF MONEY

Commodity Price in (2001-02) Price in (2009-10) % increase in

inflation

Sugar (1kg) 16.00 40.00 150.00%Cooking Oil (5 liters) 290.00 500.00 72.41%

Gold (10 grams) 4474.00 17138.00 283.06%

Silver (1 kg) 7868.00 28345.00 260.26%

Rice (1 kg) 14.00 35.00 150.00%

Wheat (1 kg) 10.00 30.00 200.00%

Petrol (1 liter) 33.46 48.83 45.94%

Diesel (1 liter) 19.88 36.74 84.81%

Source: For bullion prices – RBI, the prices of other commodities are approximate prices from web sources

Example 2: Now if you want to buy a house after 20 years the amount of saving and investment

required to be made every month at various rates of return to build up corpus of various

amounts will be;


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EQUITY

BONDS

FIXED

DEPOSITS

MUTUAL

FUNDS

Corpus required/

Interest rate

50,00,000 60,00,000 70,00,000 80,00,000 90,00,000 10,00,000

6% 10,973.44 13,168.12 15,362.81 17,557.50 19,752.19 21,946.87

8% 8,731.18 10,477.42 12,223.66 13,969.89 15,716.13 17,462.37

10% 6,906.20 8,287.44 9,668.69 11,049.93 12,431.17 13,812.41

12% 5,435.63 6,522.75 7,609.88 8,697.00 9,784.13 10,871.25

15% 3,767.69 4,521.23 5,274.76 6,028.30 6,781.84 7,535.38

Example 2: Suppose your parents are to retire and you want to build up a corpus for their

retirement then how much of corpus is required at their retirement to get continuous flow of

cash for their monthly expense requirement at 7% rate of return and 5% inflation rate?

Monthly

expenses /

years to retire

10,000 12,000 15,000 18,000 20,000 25,000

5 5,73,081.76 6,87,698.12 8,59,622.64 10,31,547.17 11,46,163.53 14,32,704.41

10 10,94,691.47 13,13,629.77 16,42,037.21 19,70,444.65 21,89,382.95 27,36,728.68

15 15,69,452.16 18,83,342.59 23,54,178.24 28,25,013.89 31,38,904.32 39,23,630.40

20 20,01,571.62 24,01,885.95 30,02,357.43 36,02,828.92 40,03,143.24 50,03,929.05

25 23,94,879.74 28,73,855.68 35,92,319.61 43,10,783.53 47,89,759.47 59,87,199.34

Example 3: Monthly investment you require to build your corpus_______

For calculation purpose, amount that you have to invest regularly to build

the corpus of ` 10 lakhs. If your requirement is 20 lakhs, then multiply the

monthly investment amount by

Interest rate / No

of year

6% 8% 10% 12% 15%

5 14,321.72 13,621.38 12,958.11 12,329.91 11,449.24

10 6,125.04 5,516.23 4,963.82 4,463.57 3,802.02

15 3,468.51 2,943.09 2,489.91 2,101.14 1,622.41

20 2,194.69 1,746.24 1,381.24 1,087.13 753.54

25 1,471.50 1,093.09 804.40 587.47 362.77

30 1,021.18 705.41 480.93 324.57 177.56

What are the measures I can take to minimize my risk?

Diversification

SHANTANU: Why do I need to invest in

various asset classes? Rather if I invest in just

one I don’t have to maintain a huge portfolio.

Also, managing just one asset class sounds

a lot easier. I can also save on the portfolio

manager’s fees too.

Assumption:

You can take

interest rate as

per your risk

profile.


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NIKHIL: Well, when it comes to investments one should

remember that investing in various asset classes has its own

advantage. When you distribute your investment across various

asset classes, your risk is balanced out across the portfolio. Let

me give you an example.

(Look at how Nikhil explains diversification in the followingsteps.)

NIKHIL: Suppose the amount available with you for investing is ` 10, 000. You make investments

in various assets. You invest ` 3500 each in equity (which are shares or stock of a company)

and bonds which may be government securities or corporate bonds. The rest of the funds

are allocated to commodities, let’s say gold or silver, which is termed as bullion in commodity

markets. Now, say the company’s shares in which you have invested have not performed well

then there is a possibility that you may lose money on the capital invested in these shares.

However, since you have invested in other asset classes the decrease in value of any one

asset will be balanced by the gain in other asset classes. This is the benefit of diversification.

Diversification thus reduces the risk of the portfolio. If two asset classes are correlated, it implies

that when one asset class does not perform well the other asset also loses value dependingupon the extent to which they are correlated. If they are positively correlated the direction

of movement would be the same but if they are negatively correlated they would move in

opposite directions. Investors park their funds in different asset classes with a motive to even

out the losses in one asset with the gains in other asset classes. One should always analyze the

fundamentals of the company before investing in its stocks. If one wishes to invest in equity

markets, he or she may choose to do so by investing in blue chip companies which have good

fundamentals rather than investing in companies whose business you do not understand.

Asset Allocation

Every asset class has its own risks and returns. Equity investments are considered to be risky

investments as they might lead to erosion of capital invested, whereas government bonds

are considered to be risk free as you are confident that the government will not default on its

interest payments. When it comes to choosing what investments would suit you shoud check

your financial goals along with risk and returns associated with each investment product. You

should allocate your funds on the basis of the above analysis. This is termed as asset allocation.

In other words, now you would begin implementing your financial plan. Asset allocation is a

technique for investing your money into various asset classes. You should opt for planning

and allocation of assets that suit your income and risk appetite. If your risk appetite is high,

you can consider relatively risky assets, but if your risk appetite is low, then you should opt for

less risky assets. While allocating your funds to various assets, it is important to see that you

distribute your funds across various assets to benefit from diversification.

Asset Allocation

Funds ` 10, 000

Investments - Stocks ` 3500

Bonds ` 3500

Bullion ` 3000


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Savings mean the funds you keep aside in safe custody like bank saving accounts. While

investing, on the other hand, means to purchase various financial instruments which will

pay you a return on some future date. The difference between savings and investment is that

savings is simply idle cash while investments help your funds to grow over a period of time.

We can meet our short term needs with our savings but to meet our long term goals we need

to make investments. Savings help to protect our principal while investments help us earn

returns over our investments

9. LOANS V/S INVESTMENTS

People always are confused whether they should avail a loan or build investments to achieve

their financial goal. Both of the options are different and should be availed appropriately. The

following points are worth remembering:

• It purely depends on your financial strength and other factors.

• Credit card debts and personal loans are very costly

• If you have a loan with a low interest rate and tax benefits as in the case of home loans, it is

advantageous to go for a loan. If you have an investment plan where you can make good

return, and then you may opt for investment.

• You have to be sure that the investment is not risky and will not affect your family if you

lose the money. For example, you are investing huge sums in share market, instead of

closing the existing debts, that is too much risk.

Basics & Dangers of Credit Cards

SHANTANU: I was thinking of getting a credit card? Should I?

NIKHIL: People of your age fancy credit cards, they feel that having a credit card is like a status

symbol because it gives them the ease of payment at any time but what they forget is the bill

they need to pay later.

Disadvantages1. Credit cards come with a lot of additional charges like interest rates, service charges etc.

in exchange for the credit offered by them. People forget to read these terms before

purchasing a credit card.

2. Credit cards often tempt people to spend more even if they do not have money today as

they have the comfort of paying back later.

3. People tend to purchase more credit cards so as to extend their earnings and later end up

piling huge sums of debt.

Advantages

1. Credit cards offer a number of gifts like cash back, holiday vouchers and other coupons on

making purchases through using credit cards.

2. Credit cards offer the benefit of traveling without cash.3. Credit cards offer cash in advance and hence are easier to use.


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It is advised that one should learn to save and manage their funds wisely. Always try to cut back

on your spending and rethink before you buy any items other than your basic needs. People

at your age are very keen on electronic gadgets and wish to spend on the latest in town. But

what you do not realize is these gadgets cost quite a lot on your pockets, squeezing your bank

accounts to an extent that you would not be able to pay up for your education.

SHANTANU: I remember even I need to pay back my educational loan after I complete my

graduation. I had completely forgotten about this.

NIKHIL: I am glad you told me about your loan before you registered for a credit card. If you

already have debt to repay why should you go for more debt? It will not help your financial

position. You should instead make investments that will help you repay the loan and also

support your needs for the future.

10. SAVINGS & INVESTMENT RELATED PRODUCTS

Banks

Bank deposits are safe investments as all bank deposits are insured upto a maximum of

` 100,000 under the Deposit Insurance & Credit Guarantee Scheme of India. Banks are subject

to control and regulated by the Reserve Bank of India. They offer various types of deposits,

depending on the needs of the customer. Bank deposits are preferred more for their liquidity

and safety than for the returns thereon. It is possible to get loans up to 75 - 90% of the depositamount from banks against fixed deposit receipts.

TYPES OF DEPOSITS AND KEY FEATURES

Savings Bank Account

• Often the first banking product people use

• Low interest however, highly liquid

• Suitable for inculcating the habit of saving among the customers

Bank Fixed Deposit (Bank FDs)

• Involves placing funds with the banks for a fixed term (not less than 30 days) for a certain

stipulated amount of interest• The ideal investment time for bank FDs is 6 to 12 months as normally interest on bank less

than 6 months bank FDs is likely to be low

• The time frame assumes importance as early withdrawal may carry penalty

Recurring Deposit Account

• Some fixed amount is deposited at monthly intervals for a pre-fixed term

• Earns higher interest than Savings Bank Account

• Helps in the saving of a fixed amount every month

Special Bank Term Deposit Scheme

• This is the Tax Saving Scheme available with banks

• Relief under Section 80C of the Income Tax, Act available• Term deposit of five years maturity in a scheduled bank is mandatory


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GOVERNMENT SCHEMES

Tax Savings Schemes*

The Government of India has launched Income Tax Saving Schemes including:

•

• Public Provident Fund (PPF)

•

The incomes from the investment are exempt from Income Tax and the investments in these

schemes are deductible subject to certain limits from the taxable income.

National Savings C C)

• Popular Income Tax Savings scheme, available throughout the year

• Interest rate of 8%

• Minimum investment is ` 100/- and with no upper limit

• Maturity period of 6 years

• Transferable and a provision of loan on the basis of this scheme

Public Provident Fund (PPF)

• Interest rate of 8.6% p.a

• Minimum investment limit is ` 500/- and maximum is ` 100,000/-

• Maturity period of 15 years

•

amount can be returned in maximum of 36 installments

• A person can withdraw an amount (not more than 50% of the balance) every year from the7th year onwards

• It is one of the best Income Tax Saving Schemes

• It is available throughout the year

•

be divided into following categories:

• Monthly Deposit

• Saving Deposit

• Time Deposit

• Recurring Deposit

Equity Linked Savings Schemes (ELSS)

•

• Lock in period of three years

• Dividends are also tax free

•

capital gains tax is to be paid

• Minimum investment is ` 500 and then multiples thereof

• Investor can opt for systematic investment plan

Infrastructure Bonds

• Lock in period of three years

•

` 20,000•

* Investors are advised to see latest Income tax provisions from relevant sources


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Bonds

A Bond is a loan given by the buyer to the issuer of the instrument, in return for interest. Bonds

interest income from the seller and the par value of the bond is receivable by the buyer on the

TYPES OF BONDS

Tax-Saving Bonds

• Infrastructure Bonds under Section 88 of the Income Tax Act, 1961

• NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961

• RBI Tax Relief Bonds

Regular Income Bonds

Regular-Income Bonds provide a stable source of income at regular, pre-determined intervals.

Examples are:

• Double Your Money Bond

• Step-Up Interest Bond

• Retirement Bond

• Encash Bond

• Education Bonds

• Money Multiplier Bonds

• Deep Discount Bonds

Key Features

• Rated by specialised credit rating agencies like, CRISIL, ICRA, CARE, Fitch etc. The yield on a

bond varies inversely with its credit (safety) rating

• Suitable for regular income. Interest received semi-annually, quarterly or monthly

depending on type of bond

• Bonds available in both primary and secondary markets

• Market price depends on yield at maturity, prevailing interest rates, and rating of the issuer

• One can borrow against bonds by pledging the same with a bank

• Minimum investment ranges from ` 5,000 to ` 10,000

• Duration usually varies between 5 and 7 years

• Can be held in demat form

Debentures

Key Features of Debentures

• Fixed interest debt instruments with varying period of maturity, similar to bonds, but are

issued by companies

•

• May or may not be listed on the stock exchange. If they are listed on the stock exchanges,


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they should be rated prior to the listing by any of the credit rating agencies designated by

SEBI

• Maturity period normally varies from 3 to 10 years

Types of debentures

• There are different kinds of debentures, which can be offered. They are as follows:• Non convertible debentures (NCD) – Total amount redeemed by the issuer

• Partially convertible debentures (PCD) – Part is redeemed and part is converted to equity

shares with or without the option to investor.

• Fully convertible debentures (FCD) – Whole value is converted into equity. The conversion

price is stated when the instrument is issued

Company Fixed Deposits

Key Features

• Fixed deposit scheme offered by a company. Similar to a bank deposit

• Used by companies to borrow from small investors

• The investment period must be selected carefully as most FDs are not encashable prior to

their maturity

• Not as safe as a bank deposit. Company deposits are ‘unsecured’

• Offer higher returns than bank FDs, since they entail higher risks

• Rating can be guide to their safety

Mutual Funds

A mutual fund pools money from many investors and invests the money in stocks, bonds,

short-term money-market instruments, other securities or assets, or some combination of

these investments. The combined holdings the mutual fund owns are known as its portfolio.

Each unit represents an investor’s proportionate ownership of the fund’s holdings and the

income those holdings generate.

Salient Features of Mutual Funds

• Professional Management – Money is invested through fund managers

• Diversification - Diversification is an investing strategy that can be neatly summed up

as “Don’t put all your eggs in one basket”. By owning shares in a mutual fund instead of

owning individual stocks or bonds, the risk is spread out

• Economy of Scale - Because a mutual fund buys and sells large amounts of securities at

a time, its transaction costs are lower than what an individual would pay for securities

transactions

• Liquidity - Just like individual shares, mutual fund units are convertible into money by way

of sale in the market

• Simplicity - Buying a mutual fund unit is simple. Many banks have sponsored their ownline of mutual funds and the minimum investment amount is small

• Investors should examine each of the above features carefully before investing in mutual

funds

Types of Mutual Funds

Each fund has a predetermined investment objectives that tailors the fund’s assets, regions of

investments and investment strategies. At the fundamental level, there are three varieties of

mutual funds:

• Equity funds (stocks)

• Fixed-income funds (bonds)

• Money market funds


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All mutual funds are variations of these three asset classes. For example, while equity funds

that invest in fast-growing companies are known as growth funds, equity funds that invest

only in companies of the same sector or region are known as specialty funds.

Mutual Funds can also be classified as open-ended or closed-end, depending on the maturity

date of the fund.

Open-ended Funds

• An open-ended fund does not have a maturity date

• Investors can buy and sell units of an open-ended fund from / to the Asset Management

Company (AMC), at the mutual fund offices or their Investor Service Centres (ISCs) or

through the stock exchange.

• The prices at which purchase and redemption transactions take place in a mutual fund are

based on the net asset value (NAV) of the fund

Closed-end Funds

• Closed-end funds run for a specific period

• On the specified maturity date, all units are redeemed and the scheme comes to a close• The units shall be listed on a stock exchange to provide liquidity

• Investors buy and sell the units among themselves, at the price prevailing in the stock

market

Money Market Funds

• Invest in extremely short-term fixed income instruments

• The returns may not be very high, but the principal is safe

• These offer better returns than savings account but lower than fixed deposits without

compromising liquidity

Bond/Income Funds

• Purpose is to provide current income on a steady basis

• Invests primarily in government and corporate debt

• While fund holdings may appreciate in value, the primary objective of these funds is to

provide a steady cash flow to investors

Balanced Funds

• Objective is to provide a balanced mixture of safety, income and capital appreciation

• Strategy is to invest in a combination of fixed income and equities

Equity Funds

• Invest in shares and stocks

• Represent the largest category of mutual funds

• Investment objective is long-term capital growth with some income• Many different types of equity funds because of the different types of investment objectives

Foreign/International Funds

• An international fund (or foreign fund) invests in the equity of the companies which are

outside the home country

Sector funds

• These are targeted at specific sectors of the economy such as financial, technology, health,

etc.


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Index Funds

• This type of mutual fund replicates the performance of a broad market index such as the

SENSEX or NIFTY

• An index fund merely replicates the market return and benefits investors in the form of

low fees

Equity

The ownership interest in a company of holders of the common and preferred stock.

A stock market is a public market for the trading of company shares at an agreed price; these

are securities listed on a stock exchange.

The shares are listed and traded on stock exchanges which facilitate the buying and selling of

stocks in the secondary market. The prime stock exchanges in India are The Stock Exchange

Mumbai, known as BSE and the National Stock Exchange known as NSE. The purpose of a stock

exchange is to facilitate the trading of securities between buyers and sellers, thus providing

a marketplace. Investing in equities is riskier and definitely demands more time than other

investments.

There are two ways in which investment in equities can be made:

• Through the primary market (by applying for shares that are offered to the public)

• Through the secondary market (by buying shares that are listed on the stock exchanges)

Having first understood the markets, it is important to know how to go about selecting a

company, a stock and the right price. A little bit of research, some diversification and proper

monitoring will ensure that the investor earns good returns.

Depository SystemIn order to invest in shares, it is necessary to understand the term “Dematerialisation of

Shares”, as almost all shares now are in “Demat” form. Earlier, there used to be physical share

certificates issued, which are now converted to Electronic form. For this, an understanding of

the depository system becomes essential.

A depository is an organisation which holds securities (like shares, debentures, bonds,

government securities, mutual fund units etc.) of investors in electronic form at the request of

the investors through a registered Depository Participant. It also provides services related to

transactions in securities. It can be compared with a bank, which holds the funds for depositors.

At present two Depositories viz. National Securities Depository Limited (NSDL) and CentralDepository Services (India) Limited (CDSL) are registered with SEBI.

A Depository Participant (DP) is an agent of the depository through which it interfaces with the

investor and provides depository services. Public financial institutions, scheduled commercial

banks, foreign banks operating in India with the approval of the Reserve Bank of India, state

financial corporations, custodians, stock-brokers, clearing corporations /clearing houses,

NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements

prescribed by SEBI can be registered as DP. Banking services can be availed through a branch

whereas depository services can be availed through a DP.

It is now compulsory for every investor to open a beneficial owner (BO) account to trade in the

stock exchange or apply in public issue. Therefore, in view of the convenience as listed below,it is advisable to have a beneficial owner (BO) account.


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However to facilitate trading by small investors (Maximum 500 shares, irrespective of their

value) in physical mode the stock exchanges provide an additional trading window, which

gives one time facility for small investors to sell physical shares which are in compulsory demat

list. The buyer of these shares has to demat such shares before further selling.

Benefits of availing depository services include:• A safe and convenient way to hold securities;

• Immediate transfer of securities;

• No stamp duty on transfer of securities;

• Elimination of risks associated with physical certificates such as bad delivery, fake securities,

delays, thefts etc.

• Reduction in paperwork involved in transfer of securities;

• Reduction in transaction cost;

• No odd lot problem, even one share can be traded;

• Nomination facility;

• Change in address recorded with DP gets registered with all companies in which investor

holds securities electronically eliminating the need to correspond with each of them

separately;• Transmission of securities is done by DP eliminating correspondence with companies;

• Automatic credit into demat account of shares, arising out of bonus/split/consolidation/

merger etc.

• Holding investments in equity and debt instruments in a single account.

Points to Remember

• Participants range from small individual stock investors to large fund traders, who can be

based anywhere

• One of the most important sources for companies to raise money

• Allows businesses to be publicly traded, or raise additional capital for expansion by selling

shares of ownership of the company in a public market

• Stock market is often considered the primary indicator of a country’s economic strength

and development

• Stock prices fluctuate, in marked contrast to the bank deposits or bonds

• The reasons for investing in equity must also be reviewed periodically to ensure that they

are still valid

• Sometimes the market seems to react irrationally to economic or financial news, even if

that news is likely to have no real effect on the value of securities itself

• Over the short-term, stocks and other securities can be battered or buoyed by any number

of fast market-changing events, making the stock market behaviour difficult to predict.

Investment Philosophies

• Evaluate risk of every investment• Have clarity on short term and long term needs of the family

• Decide the investment based on the needs

• Do not invest in any scheme that you do not understand

• Do not invest on trust. Have everything backed up by documents

• Take into account tax implication of every income

• Do not blindly follow market tips and rumours

• Anything that appears unnaturally high or low will have some ‘catch’ disguised

• Do not follow schemes where you may protect the interest but lose the principal

• Invest with knowledge after understanding the product well


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11. PROTECTION RELATED PRODUCTS

Insurance Policies*

Insurance, as the name suggests is an insurance against future loss. However, although lifeinsurance is most common, there are other schemes that generate regular income and cover

other types of losses.

Life InsuranceLife Insurance is a contract providing for payment of a sum of money to the person assured or,following him to the person entitled to receive the same, on the happening of a certain event.It is a good method to protect your family financially, in case of death, by providing funds for

the loss of income.

Term Life Insurance• Gaining popularity in India• Lump sum is paid to the designated beneficiary in case of the death of the insured• Policies are usually for 5, 10, 15, 20 or 30 years• Low premium compared to other insurance policies

• Does not carry any cash value

Endowment Policies• Provide for periodic payment of premiums and a lump sum amount either in the event of

death of the insured or on the date of expiry of the policy, whichever occurs earlier

Annuity / Pension Policies / Funds

• No life insurance cover but only a guaranteed income either for life or a certain period• Taken so as to get income after the retirement• Premium can be paid as a single lump sum or through installments paid over a certain

number of years• The insured receives back a specific sum periodically from a specified date onwards (can

be monthly, half yearly or annual)

• In case of the death, it also offers residual benefit to the nominee.

Units Linked Insurance Policy (ULIP)• A ULIP is a life insurance policy which provides a combination of risk cover and investment.• The dynamics of the capital market have a direct bearing on the performance of the ULIPs.

• The investment risk is generally borne by the investor• Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile

and time horizons. Different funds have different risk profiles. The potential for returns alsovaries from fund to fund

• ULIPs offered by different insurers have varying charge structures. Broadly the different feesand charges include- Premium allocation charges, Mortality charges, fund managementfees, policy/administration charges and fund switching charges

New Pension Scheme, 2009• Defined contribution scheme open to any Indian Citizen between the age of 18 and 55• The individual invests a certain amount in a pension scheme till he retires• At retirement, he is allowed to either withdraw the money that has accumulated or buy an

immediate annuity from an insurance company to generate a regular income or do both.A minimum of 40% needs to be used to buy an immediate annuity, a maximum of 60% of

the money accumulated can be withdrawn


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• Buying an immediate annuity assures a regular payment from the insurance company. This payment can be monthly, quarterly, half yearly or once a year

• The minimum amount that needs to be invested per contribution is ` 500. A minimum of

four contributions need to be made per year. Other than this, a minimum of ` 6,000 needs

to be invested per year

• There are no upper limits on the amount of money that can be invested as well as thenumber of contributions that can be made• The money you invest in NPS will be managed by professional managers• You can switch fund managers if you are not satisfied with the performance of your fund

manager

• This is a non-withdrawable account and investments in this keep accumulating till youturn 60. Withdrawal is allowed only in case of death, critical illness or if you are building orbuying your first house

• Under Section 80CCD of the Income Tax Act investments of up to ` 1 lacs in the NPS can

be claimed as tax deductions. Remember that this ` 1 lacs limit is not over and above the

` 1 lacs limit available under Section 80C• Also no return is guaranteed as it is in case of PPF. The money you make is dependent on

how well the fund managers chosen by you perform

Health Insurance

Health Insurance policies insure you against several illnesses and guarantee you stay financiallysecure should you ever require treatment. They safeguard your peace of mind, eliminate allworries about treatment expenses, and allow you to focus your energy on more importantthings.

There are several health insurance or medical insurance plans in India. These can be dividedinto the following categories based in the coverage offered:

Comprehensive health insurance coverage: These plans provide you complete healthcoverage through a hospitalisation cover while at the same time also creating a health fund tocover any other healthcare expenses

Hospitalisation plan: These health insurance plans cover your expenses in case you need to

be hospitalised. Within this category, products may have different payout structures and limitsfor various heads of expenditure. The hospitalisation coverage may be reimbursement basedplans or fixed benefit plans. These plans aim to cover the more frequent medical expenses.

Critical Illness Plans: These health insurance plans provide you coverage against criticalillness such as heart attack, organ transplant, stroke, and kidney failure among others. These

plans aim to cover infrequent and higher ticket size medical expenses.

Specific Conditions Coverage: These plans are designed specifically to offer health insuranceagainst certain complications due to diabetes or cancer. They may also include features suchas disease management programs which are specific to the condition covered.

* Read latest provisions of schemes carefully as information provided herein may change.


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12. BORROWING RELATED PRODUCTS#

With today’s heightened cost of living, debts become a usual thing. A number of people apply

for personal loans, car loans, mortgage loans, and a whole lot of others. There seems to be a

loan for everything. Often, financial troubles begin as a result of too large debt.

DIFFERENT TYPE OF LOANS AVAILABLE

Personal Loan

Personal loans are usually taken when you have to meet unexpected needs that are beyond

a persons immediate financial means. People often get into financial trouble by taking out

personal loans just for the extra money, or to purchase frivolous items, and then find that they

can’t make the monthly payments required.

Key Features

• Be ready for high interest rates of 14-18% p.a, high fees and even higher monthly

installments

• The application process can be time consuming, taking weeks to be approved and funds

disbursed, quite impractical for those unexpected immediate needs

• Rates and terms of the personal loans can vary tremendously, careful comparison is

wise, helping to ensure that the consumer does not pay more than necessary for those

emergency funds

• Take your time and do the homework before taking a personal loan

• Not advisable except for emergency requirements

Housing Loan

A home loan is just another loan with your house as the collateral. If you are buying your

first home then it is important to understand the ins and outs of home loans. There are many

variations according to the economy and what the market is doing that determines things that

are going to apply to your home loan.

Key Features

• Banks finance 75-80% of the property value

• Banks have recently started to offer lower fixed ‘teaser’ rates for a short period of time. Then after some time the interest rates jump up and become variable. Be careful to read

the fine print.

• Most housing loans have a minimum lock in period of 3 years or more.

• Heavy penalty charges for pre payment

• Hidden fees include appraisal fees and other charges associated with the loan

• If you want to sell the house the loan becomes payable immediately

Reverse Mortgage

The whole idea of a reverse mortgage is entirely opposite to the regular mortgage process

where a person pays the bank for a mortgaged property. This concept is particularly popularin the western countries.


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Key Features

• A senior citizen who holds a house property, but lacks a regular source of income can put

his property on mortgage with a bank or housing finance company. The bank/ housing

finance company pays the person a regular payment

• The good thing is that the person who ‘reverse mortgages’ his property can stay in the

house for his life and continue to receive the much needed regular payments. So effectivelythe property now pays for the owner.

• The way this works is that the bank will have the right to sell off the property after the

incumbent passes away or leaves the place, and to recover the loan. It passes on any extra

amount to the legal heir

Draft Guidelines of reverse mortgage in India prepared by RBI have the following salient

features:

• Any house owner over 60 years in eligible

• The maximum loan is upto 60% of the value of residential property

• The maximum period is 15 years

• The borrower can opt for monthly, quarterly, annual or lump sum payments at any point,

as per his discretion• The revaluation of the property has to be undertaken by the Bank or HFC once every 5

years

• The amount received through reverse mortgage is considered as loan and not income

• Reverse mortgage rates can be fixed or floating and hence will vary according to market

conditions depending on the interest rate regime chosen by the borrower

Loan against Securities

The main purpose of taking loans against shares is to preserve investment, apart from taking

care of personal needs. People also resort to such a loan to meet their contingencies and get

liquidity without actually selling the shares. It is advisable to take loan against securities only

when you are expecting a certain sum of money a few months down the line and you needsome funds in the interim.

Key Features

• RBI allows banks to lend up to 75% of the value of demat shares and 50 per cent of the

value of physical shares. However, banks can, and do, fix their own limits with respect to

the extent of funding within that range

• Banks have an approved list of securities that they lend against and this list varies from one

lender to the other. This list also gets revised from time to time

• Loans against mutual fund units are based on their NAV value

• The amount of loan that you will get depends on the valuation of the security, applicable

margin, your ability to service and repay the loan and other conditions

• Interest rates usually range between 14-18%

• Charges vary from bank to bank and usually include processing fees (1-1.5%) and

documentation charges

• Only fully paid shares are accepted

• Scrips in the name of corporate, minors, Firms, HUF, and NRIs are not eligible for finance

under this scheme

# Plese check latest guidelines / provisions for each loan

Credit Card Debt

Credit card debt is usually resorted to when all other option including personal loans are

exhausted. Credit card debt is unsecured therefore it carries very high interest rates. A credit


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card gives you the power to spend money even when you don’t have the funds. Lots of young

people misuse it by spending on frivolous things

Stay away from credit card debt: Lots of people are having problems with credit debt. Paying

only the minimum is costly and will ensure that you have debt for a long time. Try to consistently

pay as much as you are able to, towards your debts - you will be glad you did.

Key Features

• Interest rates on credit cards are probably the highest compared to other credit facilities.

The interest ranges from 18-36% p.a

• Debt keeps accumulating via interest and penalties. If you are not paying off your

outstanding balance before the interest free period expires then you will be paying a high

interest rate. This can make it hard to reduce your credit card debt

• As most credit card limits are low some borrowers tend to neglect the fact that the interest

payment is relatively small on a month to month basis. This is a dangerous practice because

the amount of interest you pay can quickly jump to exceed the value of your actual debt

• Be very careful of having multiple cards and be very careful of taking up the marketing

promotions from credit card providers when they actively try and get you to increase yourcredit card limit

Steps to Avoid Excess Debt

Set debt limits

• Decide how much you can afford to be in debt. Then, make sure that your total debt is

below this amount

• You may also want to set a limit on how much money out of each paycheck you are willing

to spend on debts. Having this sort of l imit can be very useful in ensuring that you do not

overextend your credit

Shop carefully for debts• If you do need a loan, be sure to do your research well. Always understand how much

you will pay for your loan in interest and look for the lowest interest rates and the most

affordable debt you can find. This will ensure that you do not end up overspending on

interest rates

• Once a year, check to make sure that you are still getting the best interest rates and best

loan deals possible

Don’t give into temptation

• Once you show that you can handle some debt, many companies will be eager to offer

you more credit. Companies may start sending you credit card offers and your lenders may

offer you additional credit products

• While it may be tempting to take out lots of new debt, you need to be wary of doing so.Only take out a loan or credit service when you really need to

Automatically have money go towards your bills

• Many banks and employers will allow you to have some money automatically deducted

from your paycheck

• This can be a great way to ensure that your bills get paid promptly. Plus, since you won’t

even see the money, you are less likely to miss it


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13. INVESTMENT STRATEGIES

SYSTEMATIC INVESTMENT PLANS:

Starting early is the key to financial planning; today you don’t necessarily need to inherit wealth

from family to get wealthy. SIP or systematic investment plans are an excellent means by which

you can start investing small, fixed sums of money at regular intervals, (commonly 1 month) most

ADVANTAGES

OF SIPSYSTEMATIC AND

USER FRIENDLY

GET BETTER

RETURN IN THE

LONG RUN BY

INVESTING EVERY

MONT

INVESTORS HAVE

AN OPTION OF

EITHER TAKING

DIVIDEND PAYOUT

OR TAKING AGROWTH OPTION

SIP GIVES YOU THE

OPTION TO INVEST

EVEN A MINIMAL

AMOUNT OF ` 500

EACH MONTH

PAYMENT THROUGH

POST DATED

CHEQUES OR A

DEBIT FACILITY

EASY AND

DISCIPLINED

TANSFER

DIVIDEND-

GROWTH OPTION

AFFORDABLE

SIPs start at minimal ` 500 a month, affordable to a beginner like you.

THE CONCEPT OF RUPEE COST AVERAGING:

SIP uses the concept of rupee cost averaging. Let me illustrate this with the help of an example:

Month January February March April

A: Amount

invested (Rs

per month)

500 500 500 500

B: NAV 8 10 13 12

C: No. of units

(A/B)

62.50 50 38.46 41.67

` 500 invested in January would fetch you 62.50 units compared to just 41 units in the month

of April. Thus by investing the same amount of ` 500 every month, you buy more units when

the market is down and buy fewer units when the market is up. Thus lowering your average

cost per unit. SIP acts as an excellent means by which you can save time and efforts in tracking

the stock market movements.

DID YOU KNOW?

A ONE TIME INVESTMENT CARRIES MORE RISK THAN A SIP.


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14. HOW NOT TO LOSE MONEY?

Updating oneself with the current happenings is a must for every investor as he will then be

aware of various events in the financial markets. In addition to this, there are various matters

that need to be looked into to keep a check on your portfolio. If you do not then you may end

up losing your returns.

You should make a habit of analyzing your investments, valuing your investments and

rebalancing your portfolio.

If you are investing in mutual funds, you can keep a watch on the daily NAV (Net asset value)

of the particular fund just like you watch the daily stock prices. You should also be aware of

various financial ratios like profit margins, solvency ratios and liquidity ratios, which give you

an idea of how the said company is in terms of profitability of its projects, share value andother factors. If you are investing in bonds you should be aware of the bond’s maturity, the

rate of interest and other elements of the bond. If you are aware that the company has earlier

defaulted on its interest payments on its borrowings, then it is better not to invest in securities

of that firm. It is always safer to have a good know-how on valuation techniques like ratio

analysis and investment pay-off.

You should keep an eye on how the value of your investments changes depending upon

fluctuations in the markets, economic issues and other factors.

You can analyze your investments by looking at financial statements of the companies, see

how they have performed in the past and if you expect that the company will perform well in

future, then you can think of investing in that company. You should try to familiarize yourselfwith the financial statements of the company to understand how the company utilizes its

finances. You should be wary of the publicity gimmicks that a company would put up to

impress the masses. You should develop a knack to read through what the company writes

up on its performance as a part of the results declared. Every investment you make is crucial

hence you should monitor it from the time you invest into the investment product till the time

you receive your proceeds from the investment. The time period from the beginning of the

investment, that is when you pay out from your funds to buy an asset, till the time you receive

your proceeds from the sale of the asset is termed as the Investment Life Cycle. Every investor

should monitor his investments from the time of entry till the time of exit. Throughout the time

horizon you stay invested you should maintain a check on your investments. The time horizon

varies across investors. Some may enter and exit trades within few minutes, hours or within a

day while some stay invested for years. But it is always advised that investors should remaininvested for a longer time horizon to benefit from an investment. The longer you stay invested

you attract less taxes also. But many do not do that in the hope of making quick profits.

Tax Planning

Every individual should know about the tax implications on his or her investments. Every

individual is charged income tax but the charges vary depending upon under which tax

bracket he falls.

However when it comes to investments you can get a tax rebate.

Section 80C* of the Income Tax Act allows you to get a rebate up to a limit of ` 1, 00, 000 which

is irrespective of under which tax bracket you are. This covers investments like –• Provident Fund


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• Public Provident Fund

• Life insurance premium

• Pension plans

• Equity Linked Saving Schemes of mutual funds

• Infrastructure bonds

• National Savings Certificate

Section 80D* of the Income Tax Act also allows you to get a rebate over premium payments

of medical insurance plans. This is over and out of the ` 1 lakh limit offered by Section 80C*.

80D* provides a deduction up to ` 30,000. For senior citizens, the deduction up to ` 20,000

is allowable. This deduction is available for premium paid on medical insurance for oneself,

spouse, parents and children. It is also applicable to the cheques paid by proprietor firms.

This act also exempts home loan payments. For self occupied properties, interest paid on a

housing loan up to ` 150,000 per year is exempt from tax. However, this is only applicable for

a residence constructed within three financial years after the loan is taken and also the loan if

taken after April 1, 1999.

* Readers are requested to please check the latest tax provisions and other details from relavant sources.

One can begin investing by fulfilling the following steps:-

1. Investor must have the following documents

• Personal Identification Proof – PAN Card, Passport Copy, Driving License copy

• Address proof – Utility bills – Telephone bills, Electricity bills

2. Investor should approach an intermediary which may be a broker, relationship manager

etc.

3. Investor is then required to fill up the KYC (Know your client) form and should furnish the

necessary details. In addition, he would have to fill the broker-client agreement.

4. Investors then need to open a demat account and a clearing bank account. For this, he or

she would have to furnish his or her bank account details.

Once these steps are completed an investor can begin trading in financial markets.

In case of any disputes, investors can approach the following authorities –

No. Asset Class First authority to approach If not solved

1 Shares/Securities Company/ stock Exchange

(if exchange based trading)

SEBI/MCA

2 Corporate Debt Company/ stock Exchange


RBI/ MOF

3 Commodities Stock Exchange FMC

4 Forex Stock Exchange RBI

5 Insurance Company IRDA

6 Mutual Funds AMC / Stock Exchange


SEBI

7 NBFC Concerned NBFC RBI

8 Listing /delisting /takeover

/buyback

Company SEBI

9 Merger/Amalgamation Company MCA

10 In case of government debt RBI


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Where,

SEBI - Securities & Exchange Board of India

MCA - Ministry of Corporate Affairs

RBI - Reserve bank of India

MOF - Ministry of Finance

FMC - Forward Markets Commission IRDA - Insurance Regulatory and Development Authority

The pressing need for financial education comes from two areas.

Firstly is the deterioration of personal finances. Today youngsters resort to living beyond theirmeans, have credit card debt and making risky investments.

Second is the proliferation of new and often complex, financial products that demand

more financial expertise of consumers. Turbulent market conditions and changing tax laws

compound the need for sound financial education.

Even Government servants are moving to defined contribution regimes from the earlier

schemes with defined benefits on retirement. Therefore, retirement planning becomes very

important.

Some advantages of financial education are:-

• Helps build a secure financial future. Lack of financial knowledge can affect an individual’sor family’s ability to save for long-term goals and make them vulnerable to severe financial

crisis

• Prepared for financial emergencies. By incorporating contingencies in your financial plan

you are ready to face unseen circumstances head on

• People who are financially literate are reluctant to buy financial products that they do not

understand and thus do not fall for marketing gimmicks

• Feeling a sense of accomplishment. Financial education is effective at moving people

closer to their goals

• Makes a more responsible individual with a disciplined approach to money. Helps people

from overspending and inculcates a habit of savings and investments

• You become more aware of questionable lending practices adopted by banks and other

lenders to sell their products

• Feel like you are setting a good example for your family

• Money management skills can benefit other aspects of your life


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INVESTOR PROTECTION

• Securities Exchange Board of India (SEBI) was established with the primary objective of

protecting the interest of the investors in the securities market

• SEBI can issue directions to all intermediaries and other persons associated with the

securities market in the interest of the investors or for orderly development of the securities

market

• SEBI has notified the SEBI (Investor Protection and Education Fund) Regulations, 2009 with

a view to strengthening its activities for investor protection. The fund shall be used for the

following purposes:-

• Educational activities including seminars, training, research and publications, aimed at

investors

• Awareness programmes through media - print, electronic, aimed at investors

• Funding investor education and awaren

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Lessons on Financial Planning for Young Investors - SEBI

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